Should You Invest in a Second Home or Rental Property?

The below is a sample inquiry we might receive from an individual considering buying a second home or rental property.

John, I know today’s not a good day but I don’t want to forget. When you have a few minutes…

As I told you, we’re looking to buy a new house but because the way the market is, we don’t want to sell our current house but rather keep it as an investment (it’s almost paid for!). What are the pros / cons / pitfalls tax-wise for having a property with rental income? Would I be better off to drag out the remainder of my mortgage as long as is left so that I have mortgage expense to charge against income? Any other advice? Many thanks!!!!
Below is my response:

My main advice would not center around the tax but the financial issues.

At this point in time I would suggest you be looking to eliminate rather than acquire debt.

Absent a large (half the purchase price of a new home) cash influx soon I would suggest you either:

-Stay in present home.

-Be able to put 1/3 to 1/2 down on new home and then with a plan to pay off the balance over the next five to seven years (though you might still do a longer amortization). This thought is mitigated if either you or your wife had a stop in income stream and you would still have enough with just one wage earner to easily be able to pay off the home/make the payments.

Absent those two being palatable I would suggest selling and moving rather than keeping as rental property.

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General thoughts towards having rental property.

-You would be able to handle many of the things that need to be done.

-How comfortable would you be with a tenant. Might want to work several things into the lease such as maintenance and upkeep so they know they are paying for and you know will be done.

As you know we brought our lake home at the peak of the market and now it is worth MUCH less than before. I would never suggest keeping a mortgage payment as our faith and our cash flow tell us that not having a payment is always better. Keep in mind our motto that “Credit Means You Probably Cannot Afford It.”